Labour’s manifesto made it clear that innovation would underpin any changes their government might make. Now, as Keir Starmer looks to a busy first few months in office, businesses are starting to ask how they can invest more in innovation and research & development.

Many organisations were likely pleased to see a commitment to an Industrial Strategy in the Labour manifesto. Starmer’s Labour party made it very clear that they would support business, create the climate for innovation, and enable wealth creation. However, once in office, many challenges can arise. From budget constraints to alignment across departments, delivering on promises can be tricky.

But how do we get UK companies investing more in innovation? Two of the key levers are the R&D tax credits scheme and grants. Throughout the election, business bodies had numerous thoughts on how to improve both sources of funding.

R&D tax credits

A common theme throughout the election in relation to R&D tax credits was a return to stability and developing a long-term strategy to support innovative companies. As the Campaign for Science and Engineering (CaSE) explained "recent successive policy changes to R&D tax credits, including the level at which they are set, has led to a lack of clarity and certainty for businesses."

Endless changes to the R&D tax credits scheme, when combined with HMRC’s clampdown on claims, have put many organisations off using the scheme to support their innovation strategies. The compliance check processes by HMRC have often been poorly defined, driving many legitimate claims into a protracted enquiry process, that many businesses simply cannot afford. Many clients we have spoken to have the perception that the scheme is too risky to consider using, and are not comfortable using the cash credit provided by HMRC. These fears and concerns are holding back investment and reducing the amount of money available to spend on R&D.

Without a doubt, the R&D tax credit scheme needs to be reviewed. Only two years ago businesses were praising the scheme as a beacon of stability and a great way to fund any project without needing to meet specific grant application criteria. We need to return to a stable scheme that provides a known benefit for those businesses that meet the funding criteria. But we also need clarity around who does and doesn’t qualify for support. Either HMRC needs staff who understand technology, and can apply the current rules with more certainty, or the rules need to be more prescriptive to define what can be claimed. The latter approach would likely become a legislative nightmare as updates would be required every time technology moves on.

Therefore, the new government needs to review how the scheme is administered and quickly put in place a process that companies can believe in and that provides clarity around the application of the rules.

Innovation Grants

There are wider concerns than just the R&D tax credits scheme. Many businesses would like to access grant funding to take their innovations from the drawing board to a proof-of-concept stage. This is beneficial as potential investors can see the benefits themselves and are more likely to back the business through scale-up. But, at the moment, most of the grants are competitive and highly oversubscribed, such that only 1 in 10 applications are successful. The Startup manifesto commented on this and stated that “Right now founders too often have to navigate byzantine bid bureaucracy – wasting precious time and resources… And if they get funding, the transfer of this money can be endlessly delayed, putting the viability of startups at risk.” There is a feeling that the allocation of grants needs to be reviewed and funding made more readily available if a project meets the grant criteria.

Innovate UK funds are a great support to businesses but the way these grants are allocated needs to be reviewed. But businesses need certainty that their grant application will be funded if they meet the criteria, rather than having an academia-style competition each time. It might be that the funding is reduced, or the system is based on first come, first served, but Innovate UK needs to provide business with a more straightforward grant service.

The UK needs a revised Industrial Strategy that is up to date with the needs and demands of the UK economy. There will be similarities with the 2017 review, but many technologies have moved on beyond recognition, so a refresh is overdue. Critical to success is how this strategy is implemented, as too often these plans fall apart. We don’t want to repeat the failures of the 1960s and 1970s where the UK led the way in aviation technologies but lacked a long-term plan for exploitation that left these projects as relics in a museum. Therefore, the top priority for Labour is to get this plan right and develop the long-term implementation strategy.

For businesses, a more stable and transparent R&D tax credit system could mean more predictable financial planning and increased capacity for long-term innovation projects.